Nine high conviction stocks in April

Stock investors have enjoyed an extended bull market since March 2009. It was particularly enjoyable during 2017, when the ASX 200 Accumulation Index rose by 11.8% over the year. Such an impressive return is quite extraordinary for an aging bull market going on nine years in 2018. The music seemed to stop abruptly when the S&P 500 plunged 10.2% over 13 days from late January through early February. Our market fared much better given we had missed most of the US January rally.

Although equities have recovered somewhat since, the episode is a reminder that expensive equity, bond and bond-proxy prices are at risk from the end of ultra-low cash and bond yields. The bout of volatility does present some opportunities and we added some names that we think will outperform on a risk-adjusted basis over the year.

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Four changes to our list this month

We add Suncorp Group (SUN), Cleanaway Waste Management (CWY) and CML Group (CGR) to our list in April.

This month we remove ResMed (RMD) following a strong 52% return since inclusion. While we maintain a positive view of the company's strategy, RMD has exceeded our price target and think it prudent to book in profit ahead of a typically volatile quarter for the company (RMD reports Q3 results on April 27).

Nine high conviction stocks in April

Our high conviction stocks are those that we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures.

Here are our nine high conviction stock picks this month:

Suncorp Group (SUN)

Suncorp is a financial services conglomerate offering banking, general insurance, life insurance, super and investment products.

Key reasons to buy Suncorp Group

SUN has very strong reinsurance protections this half. SUN typically allows for A$340m of natural hazard per half, but given the way its reinsurance is working in 2H18 it could see close to approximately A$700-$800m of larger claims and still be on budget.

We think SUN can comfortably get back to its long run target of 12% underlying insurance margin in FY19. This is driven by non-recurrence of some costs in FY19, benefits of SUN's business improvement program (+ approximately A$130m in FY19) and roll through of recent rate increases.

The sale of SUN's life business is also a small catalyst in our view. A sale is largely earnings neutral, but will enable capacity for buybacks. It also improves SUN's ROE by 1% and SUN's RoNTA by 4%.

With the growing importance of sustainability in household, business and government decision-making, we expect waste management to become an increasingly valuable sector with CWY the Australian leader.

Oil Search (OSH)

Oil Search is a major oil and gas developer/producer. OSH's key asset is its 29% interest in the world-class PNG LNG Project/Development, operated by ExxonMobil.

Key reasons to buy Oil Search

OSH confirmed our long-term belief at the result that a 3-train expansion of its PNG LNG operations was now the new base case to which the respective joint ventures are working. This entails a 2-train operation supported by the Elk-Antelope reserve base, and a third new train supported by P'nyang (referred to formally as PNG LNG T3).

We see a further upside scenario from Muruk potentially displacing P'nyang.

We still hold the view that OSH is ideally placed to benefit from a global-scale organic growth profile, which could be further enhanced by additional exploration and appraisal.

Link Administration (LNK)

Link is the largest provider of superannuation fund administration services to funds in the Australian super system and a leading provider of shareholder management and analytics and share registry services.

Key reasons to buy Link

We are attracted to its significant levels of recurring revenue (>70%) backed by 3-5 year contracts in a relatively defensive industry (funds administration and registry services).

We believe the market's view on LNK's core Fund Administration business being ex-growth is too bearish. We think it will at least grow at inflation levels from here. Moreover, the synergy target from the CAS acquisition of £25m would appear to be conservative.

Trading on a 16x FY19F PE (first full year of CAS acquisition), we think LNK is inexpensive for a stock of its quality.

BHP Billiton (BHP)

BHP is the world's largest diversified resources company, with a large portfolio of diversified mining and energy interests.

Key reasons to buy BHP Billiton

On recent selling pressure we step up our Add rating conviction, with the global diversified miner benefitting from a supportive commodity pricing environment.

Stronger certainty of earnings and lower capital expenditure commitments have resulted in BHP stepping up shareholder returns in recent periods, a trend that is set to accelerate with BHP preparing to divest its US onshore oil & gas business.

BHP asserts itself as an attractive sector exposure, with group EBITDA margin stable at an impressive 52%, balance sheet gearing down below 20%, and the prospect for excess cash flow being returned to shareholders.

Senex Energy (SXY)

Senex is an oil and gas company focused on operating and developing energy sources in Australia's Cooper, Eromanga and Surat Basins.

Key reasons to buy Senex

SXY is ideally positioned to make a material impact on the east coast gas market with two gas projects expected to transform earnings over the next few years.

SXY has advised it has finalised the design of sales gas processing facilities for WSGP and should have the plant online by late 2018. We expect sales revenue to start following the commissioning of this facility.

SXY is leveraged to rising oil prices through its existing oil production and longer term through its oil-linked WSGP gas sales agreement with GLNG.

CML Group (CGR)

Key reasons to buy CML Group

CGR is the second largest non-bank provider of debtor finance in Australia.

The group is well capitalised to continue to deliver organic growth via its increased scale and improving market share.

In our view, CGR has the potential to outperform earnings expectations over the next two years, in part via executing on its recent acquisition (meaningful potential cost synergies). This is coupled with a relatively undemanding valuation of approximately 10x FY19 PE.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.